Portugal's new centre-right prime minister announced on Thursday an extraordinary tax to be levied on year-end bonuses, showing his determination to fix public finances with a step beyond the country's bailout terms. Prime Minister Pedro Passos Coelho, appearing for the first time in parliament since he was elected on June 5, said his government would impose a 50 percent levy on the year-end bonus, or half a monthly salary, received by all Portuguese.

Passos Coelho said the extraordinary tax was necessary because new budget data for the first quarter showed meeting budget goals will be demanding. "I am not going to leave the bad news to others," Passos Coelho told parliament as he unveiled the measure which the outgoing Socialist government had ruled out. "The government is preparing to adopt an extraordinary contribution that will be levied on income." Passos Coelho said the only people not to have to pay the levy would be those receiving the minimum salary. He added that the measure should raise 800 million Euros in additional revenues.

Finance Minister Vitor Gaspar, speaking in parliament after the prime minister, said the government would also make additional spending cuts of 800 million Euros this year to ensure budget goals are met. Gaspar said the economy would remain in recession until 2012. "The adjustment of Portugal's economy cannot fail," Gaspar said. Portugal's 10-year bond yield fell nearly 10 basis point to around 12.2 percent after Passos Coelho spoke. The prime minister has stressed a number of times that Portugal needs to rapidly take action to regain investor confidence so that it can shake off the stigma of its 78-billion-euro bailout, which includes tough fiscal goals.

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Portugal faces more austerity as data fail to impress

Portugal’s new government faces an uphill struggle to meet state deficit targets agreed with international creditors after the release of worse than expected results for the first three months of 2011. The figures could trigger additional austerity measures by Pedro Passos Coelho, the prime minister, who has pledged to do “whatever it takes” to ensure Portugal fulfils its commitments and avoids falling into a similar predicament to Greece.

The centre-right coalition will have to cut the budget deficit by almost 3 per cent of gross domestic product by December to comply with the country’s €78bn ($112bn) bail-out package agreed with the European Union and International Monetary Fund, according to data published by the National Statistics Institute (INE) on Wednesday. The INE said the deficit fell to 8.7 per cent of GDP at the end of the first quarter, down from 9.2 per cent three months earlier. Under the rescue agreement, however, Portugal is committed to cutting the deficit to 5.9 per cent of GDP this year, 4.5 per cent in 2012 and 3 per cent in 2013.

The previous Socialist government had created expectations of a sharper fall in the deficit with figures that showed substantial cuts in government spending and increases in tax revenue. But opposition economists had warned that those figures did not properly take into account overdue state payments and the impact of state-owned company debt.

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Real estate in Portugal cheaper as demand weakens

The May figures showed that Portuguese developers reported a steep decline in prices, matching the figures reported by estate agents. The National Confidence and National Activity indices both fell by seven points to -60 and -39 respectively. Whilst prices are falling across Portugal, there are some significant regional variations. The country’s capital, Lisbon, is seeing significant falling prices whilst Porto is actually seeing a rise in new instructions, despite softer values.

However, the Algarve saw price falls actually slow with falls in new buyer enquiries and agreed sales also decelerating. Commenting on the report, RICS senior economist, Josh Miller said: “The Portuguese housing market can be characterised by falling prices, falling activity and depressed confidence. The main factor weighing on prices is weakening demand. Rising supply is not really an issue.

“Although the national picture looks quite bleak, the survey results highlight some promising regional developments during May with both new enquiries and agreed sales in Porto and the Algarve falling at a slower pace than in April.” CI Spokesman, Ricardo Guimaraes believes that enquiries in the Algarve have already started to pick up as summer approaches. He said: “This, naturally, impacts on local price expectations. By contrast, in the Lisbon and Porto regions, some survey respondents highlighted the fact that banks are tightening credit constraints and, at the same time, selling distressed properties in the market. “Such actions appear to be exacerbating downward pressure on prices in an already weak market.”